Wednesday, November 27, 2013

Burying bad news before weekends and holidays

I exploit an SEC requirement that managers have to disclose any material corporate event to investors within five business days, using Form 8-K. In this setting, managers only have discretion over the day of the week that they disclose the news. 8-K filings allow me to identify the event and the disclosure dates, and the short five-day window reduces the scope for other confounding activity.

I show managers strategically disclose negative news on Fridays in an attempt to take advantage of market under-reaction to pre-weekend announcements. The under-reaction to Friday announcements has been suggested in other settings (Bagnoli, Clement, and Watts (2005); Dellavigna and Pollet (2009)). ...

I find even though events are uniformly distributed throughout the week, managers disclose more negative news on Fridays, before national holidays, and after the market closes. This pattern is absent for non-negative news. Furthermore, negative news is clustered on Fridays regardless of the day of the week the event occurs. ...

If investors are indeed more distracted on Fridays, returns should temporarily under-react to Friday disclosures (Dellavigna and Pollet (2009)). I find a significant under-reaction in cumulative abnormal returns of approximately 50 basis points if managers disclose negative news on Friday. The mispricing persists for three weeks and is not traded away because of limits to arbitrage.

The Obama administration is expected to announce on Wednesday a one-year delay in another major element of the new health care law, which allows small businesses to go online and get insurance for their employees through the website of the federal marketplace. ...

The announcement of the delay, just before Thanksgiving, is reminiscent of the way the White House announced, just before the Independence Day weekend, a one-year delay in the requirement for larger employers to offer health insurance to employees.